HKUST welcomes opportunities to partner with family businesses and family offices to address their needs
By Professor Veronique LAFON-VINAIS,
Executive Director (Career Development and Corporate Outreach) and Associate Professor of Business Education (Finance),
Department of Finance, HKUST Business School
In the coming decades, a wave of generational wealth transfer is expected to take place, driven by demographic changes, economic development, and rising asset prices. A global transfer of wealth of US$30 trillion from baby boomers to GenX and millennials is expected, according to Campden Research. A significant and growing portion of this transfer will take place in family businesses.
The rise of the billionaires and the generational wealth transfer
Wealth has been created at an unprecedented pace in the past few decades, driven by innovation and technological developments. This has contributed to the rise of ultra-high net-worth individuals and a significant increase in the number of billionaires. Tech is the one industry in which billionaire wealth increased in 2018, according to research by UBS/PwC.
According to the UBS/PwC Billionaires Insights report 2019, billionaire wealth decreased slightly in 2018 to US$8.5 trillion, a slight drop of 4.3% globally after five years of growth at 34.5%. There were 2,101 billionaires in 2018, compared to 2,158 in 2017. Table 1 (below) shows the geographical spread of billionaire wealth.
Asia Pacific has overtaken North America as the region with the highest number of wealthy individuals (those with more than US$1 million in assets in addition to their main home). Collectively, APAC HNWI were worth US$21 trillion in 2018, according to Capgemini research.
While many of the younger entrepreneurs are first generation, especially in China, a wave of wealth transition has already started. According to UBS/PwC, there are globally around 700 billionaires aged over 70, representing about 40% of billionaire wealth.
Many large Asian family businesses are facing a delicate time when it comes to managing succession. Such a situation occurs when the founder dies or gives up control before the family has developed a strong institutional structures.1 Several examples of disputes around family succession have made the covers of newspapers, for example, the complex succession of the Ho family business in Hong Kong or in Singapore with the Lee family.2
In China, due to the impact of the One Child policy which lasted 35 years until 2016, many family businesses face a succession crisis as 80% of second generation heirs have no desire to join their family’s business.3 The situation is not unique to China: according to a Deloitte/SMU survey, 77% of first-generation respondents said a family member should take control of the business. But the figure dropped to 35% and 24% respectively for second-generation and third-generation respondents.1
A study by The Williams Group of more than 3,000 US families who had failed to transition wealth from one generation to another found that the biggest cause of failure (60%) was a breakdown in family communications and trust. The next biggest cause of failure (25%) was due to heirs who were “inadequately prepared” to inherit, and the third biggest cause (12%) was the failure to establish a family mission or purpose. Only 3% of the cases of failure arose from poor legal tax or investment advice.4 Interestingly, 47% of international families surveyed by UBS/Campden said their next generation was either “somewhat” or “very” unprepared for future succession. Almost one-third of principals said their heirs and heiresses were “not qualified enough” to manage the family wealth.5
Nevertheless, for many families the transfer is underway. According to Campden Research, “28% of next gens had taken control of the family wealth within the last ten years, while 37% are expected to take control within the next ten years. About one-third (36%) already held executive or management positions within the family office and 25% served on the board.” Campden Research added that, “The average age globally for succession of the next generation was 45 (41 in Asia Pacific).”6
To manage the transition, Asian family businesses are adopting the private trusts and family office structures that are used in the West. For example, in Singapore, the number of family offices quadrupled between 2016 and 2018, according to the Monetary Authority of Singapore.5
In response to the evolving needs of family businesses, Asian family offices are evolving from being purely investment focused to offering a platform for dispute resolution and successions planning.6
The evolving role of family offices in Asia Pacific and the growth of family networks
The role of family offices has evolved from being an investment platform to guiding the next generation(s) back into the family business.
One of the new roles may consist of inputting together a next-generation development program to help the next generation become good owners and future leaders. According to HBR, these programs focus on five key objectives: business ownership skills and competencies; family business principles and practical knowledge of the family business’ assets, understanding the family history and values; and developing personal leadership competencies.7
For example, Golden Equator Wealth, a Singapore-based multifamily office, offers young next-generation members a program in which “participants rotate through asset classes from stocks and bonds to FX, HF and private deals”. The GenINFINITY program developed by the Bank of Singapore includes “a mix of old school studies and activities like building their personal brand; visiting a startup incubator and attending an expert discussion on how AI will affect traditional industries; and a Shark Tank-style competition where participants are split into three groups to create and present start-up ideas before a panel of judges.”8
Increasingly, families eschew advice from financial institutions like investment banks or private banks and develop their own expertise, individually or in families networks. “They are forming a rapidly growing global network, increasingly doing deals directly with each other … Only 18% of wealthy individuals now identify their direct investment opportunities through financial advisers; the majority rely on personal contacts,” said an article in the Financial Times.”9 For example, “Insignia Ventures draws one-fifth of its funding from 55 mostly Chinese tech founders, a “unicorn club”. They “represent 20% of my capital but 80% of my ideas. They help me source deals – I invest in companies they refer to me.“10
Family offices source talent from each other’s ranks. For example, talent from Investor AB, the Wallenberg family office in Asia, joined Blue Pool Capital, Jack Ma’s family office.10 They also share information about new trends such as ESG or impact investing. Networks like WEcubed or The ImPact offer the chance to share knowledge and experience.11
The role of networks is closely related to the cultural concept of guanxi in China, but it is also a global trend between family businesses. “Families syndicate with one another, they’re sharing opportunities and deals and perspectives on managers. There’s a lot of information flow happening because families trust one another and they share the same type of differentiation as a pool of capital,”12 Jacqueline vonReichbauer, Head of Family Office Practice at Silicon Valley Bank , told Bloomberg.
As a result, families increasingly source deals with each other, not just in Asia but globally. For example, in Italy between the Agnelli and De Benedetti families13, and in the US between the Reimann family and the Kardashians.14
The need for lifelong education to help generational wealth transfer
As family offices expand and institutionalize to cater to the needs of their family owners, expertise and skill gaps are forming that can only be filled with lifelong education.
Family offices increasingly need not only financial and investment expertise, but increasingly a whole range of managerial and leadership skills that can be passed on to the next generation. Broadly speaking, management and leadership skills will need to be developed as the next generation moves into more managerial roles within the family business, the family office, or the family foundation.
Partnerships with leading universities and research institutions such as HKUST offer the opportunity for family businesses to fill these gaps, as well as source opportunities for investment through innovation. They also offer the opportunity for family businesses to become involved in philanthropy through long lasting contributions to education.
Families need to equip the next generation with the business and managerial skills necessary for running the family business. Such skills can be attained through traditional education programs such as MBAs or EMBAs. Many family scions have graduated from HKUST’s top ranked EMBA and MBA programs, which provide the necessary management skills alongside a high level of networking.
As family offices increasingly invest directly in private equity and venture investing12, they require complex valuation methodology and investment and portfolio analysis expertise, similar to those used in private equity and venture capital firms. These skills can be acquired through specialized executive education programs such as HKUST’s prestigious Masters in Global Finance (MSGF) dual degree program with NYU Stern, which offers in-depth financial training over a one-year part time international degree. Many family next-generation members from around the world have graduated from our MSGF, and benefited from its top-level network of financial executives.
At a more specialized level, the growth of direct private lending and private debt15 requires credit analysis skills, and the ability to analyze documentation and understand the bankruptcy laws of the relevant investments. Investments in property and real estate require extensive understanding of the relevant laws and tax implications of such investments.
When families decide to invest in acquisitions and mergers, corporate finance skills, similar to those possessed by investment bankers, are indispensable, including complex cash-flows modelling and valuation, if only to negotiate on a par with specialist firms. HKUST’s renowned Finance Department can work with our Executive Education and Tanoto Center for Asian Family Business to provide specialized education programs tailored to the family’s needs.
A successful transition to ESG investing, sustainable investing and impact investing requires an understanding of the various criteria and developments in this nascent market, particularly in Asia. Programs like ESG Investing have become extremely popular as the rise of ESG investing in the Asia-Pacific region continues. HKUST offers the opportunity to network with and learn from global specialists in environment and sustainability through our Institute for the Environment.
Communication skills, personal branding, cross-cultural skills, negotiation skills, and crisis management skills will be needed for a successful transition in an environment where geopolitical issues are increasingly flaring up. As leads arise from networks of family offices, learning how to avoid Ponzi schemes and fraud schemes typically associated with affiliation networks will require specialized education.
For example, popular programs offered by our Executive Education office such as Effective Negotiations, Managerial Decision Making and Leadership, Leading for Success and others provide broad management and leadership skill development.
Specific issues may arise with younger generations accustomed to social media, for instance, the need for privacy and cyber-threat protection, which also require specific training. Understanding the new technologies for potential investment opportunities may also require training in basic programming and coding, along with data analytics. Executive education programs such as Digital Transformation: Strategy, Change & Technology; Big Data Applications in Business; and Fintech for Non-technical Executives & Professionals can be useful to understand the technology issues of our times
Plugging the knowledge and skills gap can be accomplished through tailored programs developed with our Tanoto Center for Asian Family Business and Executive Education office, such as our popular Family Business: Leading Generations of Excellence and Family Office: A Powerful Tool for Succession Planning programs.
Beyond the need for educational training, the development of close relationships with universities and research institutions such as HKUST opens the possibility for family offices to take advantage of avenues of investment driven by research, such as incubators.
We welcome the opportunity to partner with family businesses and family offices across disciplines to address their needs in terms of skills, networking and investment opportunities.
Guest speakers and scholars who shed light on what successful family-owned companies do, in open programs jointly offered by the School’s Tanoto Center for Asian Family Business and Entrepreneurship Studies and the Executive Education Office
References
- 1. “Asia’s next generation looks outside the family business”, FT 25 Nov 2019
- 2. “Dirty fighting in some of Hong Kong’s wealthiest families may undo value of kinship”, SCMP 5 June 2017
- 3. China Unleashed: How family Business powers the Chinese Economy”, Campden FB, 23 Sept 2019
- 4. “Christmas: a time for family rows over money”, FT 17 Dec 2019
- 5. “How Asia’s new money is driving boom in “family offices” in Hong kong and Singapore, set up as one-stop shops for all wealth management needs”, SCMP 6 Nov 2018
- 6. “Family Office Principals Unconvinced by Next Generation Readiness for Succession” Campden FB, 15 Oct 2019
- 7. “How Family Business Owners Should Bring the Next Generation into the Company”, HBR 24 July 2018
- 8. “Asia’s heirs hit wealth bootcamp ahead of record inheritance”, BBRG 2 Nov 2019
- 9. “Role of banks and advisers on family office transactions diminishing”, FT 18 Oct 2019
- 10. “China’s tech billionaires keep it in the family office”, FT 31 Oct 2019
- 11. “Rich millennials push to put family wealth into impact investments”, FT 17 Oct 2019
- 12. “Billionaire Families reshape Silicon Valley’s Venture Terrain” BBRG, 31 Oct 2019
- 13. “Agnelli Scion Looks to Buy De Benedetti’s Media Company”, 2 Dec 2019
- 14. “Kylie Jenner Joins with Family That can Keep Up with Kardashians”, BBRG 19 Nov 2019
- 15. Super-Rich Families Pour Into USD 787 Billion Private Debt Market”, BBRG 10 Dec 2019
- 16. The Billionaire Effect, 2019, UBS & PwC